SPEAKER_02: Look at the best managers, and they're the ones who are able to recognize when they do have one of those top 1% companies, when they've captured that magic, and they have the confidence to let that run.And I think it's something that really distinguishes the very best managers from, again, the rest of the pack, that they understand when to take money off the table. but they also understand when to let things run.And ultimately, if you are going to get those fund returning outcomes, you might only have one of those in a portfolio of 50 companies.If you sell it too early, then you've missed your opportunity there.And almost, I would look at that as a bigger sin than perhaps not investing in it in the first place.
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SPEAKER_03: All right, everybody, welcome back to the podcast.We've got a great episode for you today.Because we have with us today somebody who's been investing in venture funds for three decades.His name is David Clark.He is the chief investment officer at Vencab.They're a UK-based fund of funds and investment advisor.If you're deep in the industry, you probably remember David. went viral on Twitter, now X, when he broke down returns from 32 years of investments at Vencap.This was obviously to somebody like myself, who is a student of the game of capital allocation and trying to get better at what I do every day.Just absolutely the content I'm here for.
And so David, welcome to the show.Thanks a lot, Jason.
SPEAKER_02: I've been listening a lot to the podcast that you put out and super excited to finally be on one. Thank you.
SPEAKER_03: Well, as you can tell from my voice, I do a lot of podcasts and today I've got my raspy voice.So I'm kind of like Bob Dylan in the later decades here.I just want to get started recapping the tweet storm and your firm Vencap, just so I make sure I level set with the audience, founded in 1987.You've made around 500 fund investments.So you have a certain number of managers and you obviously invested in them across many funds.Yep.
SPEAKER_02: Yep, correct.And just to be clear, we probably started with a very generalist approach to venture.So over time, we've backed something like 110 different managers.Over the last 10 to 15 years, we've really concentrated those down into sort of 12 to 15 groups.And it's those 12 to 15 groups that we've been active with for the last decade or so.
SPEAKER_03: Yeah.And concentrating in on those managers, you do that.Why?Because I've heard some people say, hey, you need to have a certain number of managers in order to hit certain goals.Is the goal here to hit the beta plus chance of alpha or just really go for that alpha across venture capital?
SPEAKER_02: Yeah, I think the whole conversation around alpha versus beta in venture is an interesting one.Because I think the beta in venture is, if you look at that as the median return, the average median return using the Cambridge data is about 10% IRR.And so nobody is in venture for the beta.You're only in it for the alpha.And for me, the alpha actually means the upper quartile return.But it's because of the power law nature of venture. what we found is that actually the upper quartile is very similar to the actual pooled return for venture overall.So again, if you look at the average upper quartile boundary from the Cambridge data since 2000 or so, it's about 18%.And so what we try and do is to hit that upper quartile as often as we can and get as many funds that we invest in really over that upper quartile boundary. The challenge in venture is that it's really hard.
And you know this, Jason, you've been doing this for a long time.And I think people who have come into the industry more recently have been perhaps a little less aware of that because the market's been going up and there's been a strong tailwind and everybody's been doing really well. But I think the next couple of years are going to be really challenging in the venture industry.And so the reason we concentrated down is when we looked across all the 110 managers we backed, we found the majority of those managers were only generating a median return.And there was only a handful of managers that were actually able to consistently produce upper quartile funds.And we can go into how they do that and why they do that and what the power load dynamic looks like, but happy to take that wherever it makes sense.
SPEAKER_03: Yeah.I mean, let's go right to that.What distinguishes people who have not just longevity, because my perception now going into my second decade is if you build a good enough brand, there's enough people who want access to this category that if they do get the 10% with the optionality of maybe doing a little better, let's face it, there are some LPs who would be comfortable with that as part of a blended portfolio. It's kind of like, I'm going to get above average returns with some optionality.Now, if you're really trying to sharpen the knife and get into that upper quartile and hit that 18% constantly, oof, it's really hard.So let's talk about what those funds or those managers or those brands do that makes it notable or in your estimation, worthy of being in your, I think you said your top 12.Yeah.
SPEAKER_02: Yeah.Yeah. Let me tell you what they don't do, first of all.Ooh, I like it.What they don't do is really have any lower loss ratio than the rest of the market.So this is not about minimizing your losses.So when we look across all our portfolios for an early stage fund, somewhere between 50% to 60% of deals don't return capital. Obviously, it varies a little bit by vintage air.In the most challenging vintage airs, that can be up at 70.In the best vintage airs, it can be just below 50.
But it's average in that sort of 50 to 60 mark.Even the best managers are kind of consistently around there.So venture is not about minimizing risk.This is not private equity.If we were having a conversation about private equity, we'd be having a very different conversation. Venture, as we know, is a power law industry.The power law really applies to what percent of companies ultimately generate the bulk of the value for the industry.When we look at the exit data, what we found is that it's about 30 exits a year that ultimately account for more than half of the total exit value produced by all venture-backed companies globally. we're talking the top 1% of exits.And as a percentage of the total number of companies backed, it's probably going to be smaller than that because obviously, we know a lot of companies ultimately don't exit.
So we're talking about how do you consistently get access to those top 30 companies each year that drive the bulk of the performance that comes through to the venture industry. What we found when we look at who are the investors in there is that there's a relatively concentrated group of managers who can consistently do that.It's no surprise who they are.It's Saxell, it's Sequoia, it's Andreessen Horowitz, it's Kleiner Perkins.It's the managers that most people would be able to name if you asked them, who would you say are the best performing managers, the franchise names out there? So when we look at the data, it's very clear to us.If we want to consistently capture that upper quartile return, the best way for us to do it, and I'm not saying this works for everyone.Other people will have different strengths and different approaches to the market.But certainly for us, the best way to do it is to try and optimize for those managers that are consistently able to back the top 1% companies. And we've been doing it for 15 years and it works.
Okay.
SPEAKER_03: So for your terrific 12, I'm going to call your fund managers who are... The terrific 12 is yours.Yeah.It's one of my things, Brandon.Or just concisely.So in that terrific 12, what you've learned is they have the same amount of losses.They strike out, they miss their shots, just like anybody else.Six of 10 startups return zero.Big donut, they flame out. Not zero.
SPEAKER_02: Don't return capital.Don't return capital.About half of those probably end up at a zero.
SPEAKER_03: Okay.So they don't return capital, but it's really about the very small number of outlier exits.So when you look back, you've had how many companies across the history of the fund, and then how many companies, I think you actually did a chart here, which we could pull up, how many companies would fall into that power law designation?
SPEAKER_02: So the data that we used has just under 12,000 companies.Wow.And 113 of them our fund returners.So just over 1%.So again, let's define a fund returner for the audience.Yep. Yeah.So a fund returner is a single company investment in a fund that returns the entire committed capital of that particular fund.So if you were typically an early stage fund, you might invest in 30, 40, 50 companies.
So it's one company that returns the entire capital of that fund.And very often, that company will do it multiple times over.So it doesn't just return one extra fund, it can return 5, 10, 15 extra funds. And so it's optimizing for those types of companies.And there's a few things that also kind of play into that relationship.It's what's the size of the exit?It's what's the size of the fund that's backed it?And it's how much does that fund own of that company at the time of exit?And those three things have to be in balance in order to get the fund returning outcomes we're looking for.
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Not one, not two.Three free months.All you have to do is go to gusto.com slash twist.G-U-S-T-O dot com slash twist.You must go to Gusto.Again, that's gusto.com slash twist. And so when we look at this chart, we see the 53% return under what was invested in them, get 27% that will return the money invested in them, or maybe up to three X. But as you said, a fund might have 30 companies in it, which means each company represents 3% of the capital or so, if you're just doing back of the envelope math. And so these are truly meaningless in terms of venture capital.So you have a full 80% here, almost, yeah, exactly, 80.3% that are just not moving the needle for that fund.Yeah, exactly.
And then everything, three... you know, 5x, 10x, 10x plus or fund returners.That's where you start to see the returns and why venture is so special, which then leads me to believe that there are factors that determine these outcomes.And I just want to run them by you.These would be theories because you do need to make a decision as an LP when you bet on GPs and as a GP when you're betting on companies to have what we would call a portfolio strategy.Yeah.Each fund has to have a portfolio strategy.So if, Only 1% are fund returners and you do 30 names.How hard is it to get a fund returner?
And does that not argue for maybe more names in a fund than we've seen historically?So maybe you could argue on one extreme spray and pray on the other concentration and how you think about in a portfolio construction, what's the right number of names?And when people hear me say the number of names in a portfolio, you might hear other people say logos.It means the names are the logos of the startups.
SPEAKER_02: Yeah, I think it very much depends on the stage at which you're investing.So if you're a seed fund, then because the loss ratio looks different and the attrition rate is different, you need more names.And it also means you can afford to have more names because the delta between your entry value and the exit value is so much larger that it's easier in a way to get that fund return if you do have one company that ultimately takes off and is incredibly successful. As you start to get later as an investing fund, then you do need to be more concentrated in your portfolio.Because ultimately, the multiple you will get on any individual deal will begin to come down.And so what we've tended to find for early-stage funds, and we would classify early-stage funds as kind of Series A and maybe sort of early Bs, For those early-stage funds, a portfolio of around 30-ish names is about the right size.You're looking at maybe, ideally, probably 10% to 15% ownership at the time of exit. which means that most of those early stage funds that we would be backing would today be somewhere in the region of $400 to let's call it $800 million.And so this is where the fund size versus exit size versus ownership relationship is really important.
Because if you have a manager that's only ever been able to return $500 million in a single deal and is raising a billion-dollar fund, then the confidence level that they're going to be able to produce a fund-returning outcome is very different to a manager that's raising a $500 million fund and has had multiple billion-dollar returns. single company returners.So I think it's being able to sort of handicap the ability of the manager to deliver those fund returning outcomes.And what is it that you have to believe in order to get comfortable that they can continue to do that going forward?
SPEAKER_03: And so when you are investing in that series A to series B, $50 million to $200 million valuations in 2024 terms, I think we would both agree, in order to get that 10% ownership, which is kind of a goal, right?Maybe even 15% if you're able to do it, to get that 10%. 10 to 15 in a company that has a $50 million post or a $100 or $200 million post, you're going to have to write somewhere between a $5 and a $20 million check.If you're doing 30 of those, you can just times 30 times 10 or a 30, yeah, 10 million or 30 times 15 million might be even a more reasonable number.
SPEAKER_02: You get to 450.A little bit of follow-ons as well.So you want to reserve capital for your best companies to do the next round, maybe.
SPEAKER_03: Yeah, and I don't know if you saw the Brian Singerman episode we just had recently from Founders Fund, or are you an LP in Founders Fund by chance?Are they in the Terrific 12 yet?
SPEAKER_01: We don't publicly disclose who we're investors with yet.
SPEAKER_03: Totally fine.So the Terrific 12 remain anonymous, as is Dave's wand.So Brian Singham was on, reserving 15%, 20% of the fund to put into one name.They did it with Palantir, Airbnb, SpaceX, the rest is history.So what do you think the right number is?And what do you, before the reserves, if you had to put a percentage range on it, and then what do you think of this really aggro strategy of the one?
SPEAKER_02: Yeah, let's take that one first because I think it's a super ballsy strategy to do that.
SPEAKER_01: Oh, yes, it is.
SPEAKER_02: And I think credit to the guys at Founders Funders that they've proven that they can do it successfully.As an LP, I'm happy with some of my funds doing that But I also feel I need to sleep at night.And if I had an entire portfolio that consisted of founders fund type bets, then I think that would be incredibly aggressive.So I look at it at my level from a portfolio construction point of view to say, we want to have people in that portfolio that are willing to take really aggressive bets and are willing to back their conviction and to double down on their very best companies. But at the same time, we also need to have an eye on overall risk management.And from a funder fund's perspective, I can't afford to deliver a 0.5x portfolio to my investors.That puts me out of business.What we need to be able to do is to, yes, capture the upside, but also be cognizant of the amount of risk that we're taking in order to do that. I also think it's different between, are you writing that 30% of the fund as a single check, as your first check into a company?
Or are you layering it in over time as that company is de-risking, as it's scaling, as you're getting more comfortable about the ability to execute, the size of the market, how the competition is playing out, how the economics of the business are working? I can see getting to that sort of ownership or that sort of exposure over a period of time and multiple rounds makes sense.Single investment, as I say, perhaps one or two of the funds, but I wouldn't be comfortable if everyone was doing that.
SPEAKER_03: I think you've made a great point here that I just want to highlight, which is being able to invest in the company over time gives you a decision-making process at each of those waypoints to re-underwrite the company, meet with management and really get a tight worldview on what's changed.And I've really started to take that to heart as I deploy more reserves.And I've really changed my fund strategy.When I came into the business 10 years ago, when I did my first fund, You had finished up being a Sequoia Scout.Everybody was like, yeah, you just do a $10 million fund.You do 50 or 100 names, 200K, 100K, whatever.And you're done and you just hope for the best.And unfortunately, I hit four unicorns in that first fund.
So I thought I was a genius again.What I didn't realize was, even though that fund is 5X on paper and has returned all the capital already, and I feel great about it, we looked back and If only I had saved a third of the fund, 3 million, and taken the three, you know, of the four that were breaking out, I just went back and looked at my notes and I looked at my decision-making We knew three of them were definitive winners.It was super clear.Superhuman, Calm, and Robinhood were just exceptional companies.Density, we weren't sure because it was hardware plus software.And so we were kind of monitoring it.So I'm not certain I would have made the second bet on that. And then if I just made one or two of those bets, you know, 15x fund, 20x fund.
So I guess my question from all of that is, when you look at the seed space, are any of the terrific 12s in seed?And then how do you view seed managers specifically?People who've chosen to be at the, you know, the well, you know, I always use the analogy that we were on the orchard. We pick the apples, we put them in bushels, and then we bring the bushels to the market.And then that's the Series A. So, you know, we run an orchard and we bring 100 every year, 100 of those apples to the market and we see who picks up on them.So talk to me about how you perceive seed.We went over the classic Series A fund.Now let's do the classic seed fund.Is there one in the Terrific 12?
SPEAKER_02: If so, how do you evaluate them?Yeah.So we don't have any standalone seed managers in that core manager group.However, some of those core managers will run multiple strategies, one of which will be a seed strategy.So there are seed-specific funds within our... So those 12 managers probably give us 40 or so funds across the cycle.So they're doing seed, early growth.There may be some sector-specific funds.There'll be some non-US funds.So there'll be India, there'll be China, there'll be Europe.
So there are a small number of seed funds in there.
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SPEAKER_02: The challenge we have when we are looking at seed managers in particular is that we just feel our ability to pick those managers is essentially zero.We can't separate the signal from the noise. I'd be interested to see how successful other LPs are over the course of the entire cycle in doing that.That's not because we haven't tried.I mentioned we backed something like 110 different managers. A number of those would be classed as seed managers if they were operating in that space today.It just hasn't been successful for us.So rather than trying to do something we're not good at and hope we get lucky, what we have decided to do is really concentrate on where we think we have a competitive advantage and where we know that we are playing in a market where if you are able to access those very best managers, then you're going to get that consistency of performance and consistency of hitting that upper quartile performance, vintage after vintage after vintage. It's interesting.
I've had quite a few conversations with LPs who are much more active in the seed space than we are.I know you had Michael Kim on one of your podcasts.The guys at Sendano have done a great job at pulling those portfolios together.The question I would want to ask someone like Michael is, what does that look like over the entire cycle because I think we would certainly expect seed managers to outperform in the last years of a bull market.So if you were looking at that 17 to 21 period, there's no question in our minds that seed managers would outperform during that period.
SPEAKER_03: And the reason they would outperform is because the Series B and C was so competitive and people were overpaying.
SPEAKER_02: Exactly.They were getting markups on their seed deals very quickly.The markups were very aggressive.In some instances, if they were able to sell some into those later stage rounds, then they're putting real points on the board and getting DPI back to their investors, which is incredibly important.It does feel like Things have changed, probably since the end of 2021, beginning of 2022, where I think it's getting a lot harder to make that transition from a Series C to Series A. Pricing has come down.Terms are becoming much more onerous.And going back to your earlier point, if you haven't reserved... then you could be in a difficult position, particularly if one of your companies stumbles a little bit and has to raise capital where the terms are a little bit more onerous.We've been in this long enough to remember pay-to-play rounds, remembering recaps.
It feels as if more of those are likely to be coming through over the next 12 to 18 months.And so I think one of the things I'd be interested to see is how does the performance of those seed managers that looked really good back in the end of 2021, how does that look in two or three years' time when they're having to revalue a lot of their markups, and particularly for those ones that haven't reserved and weren't able to get liquidity onto some of their positions when the market was much more positive?
SPEAKER_03: Yeah, this seems to be a leak in a lot of the early stage managers games that they don't take advantage of the secondary opportunities as they're presented.And man, looking back on it, we took advantage of a number of them very strategically.My only regret is that we didn't have a proactive unit doing it.And it's a little bit dicey because being out there trying to sell your position in your startups can create a natural amount of tension between a founder and an angel investor or seed investor. I think that's why many of them are reticent to say, I'm going to sell my shares or just even 10% of them or 20% of them because they haven't communicated that to the founders upfront, their strategy.
SPEAKER_02: I even think it's a harder decision when to sell in some instances than whether to invest in the first place.Because the other thing is you go back to the power law nature of venture.Sequoia didn't become Sequoia by selling its best companies early.They did it with Apple and John Valentine said, we're not doing that again.You look at the best managers and they're the ones who are able to recognize when they do have one of those top 1% companies, when they've captured that magic, and they have the confidence to let that run.I think it's something that really distinguishes the very best managers from, again, the rest of the pack.They understand when to take money off the table, but they also understand when to let things run.Ultimately, if you are going to get those fund-returning outcomes, you might only have one of those in a portfolio of 50 companies.
If you sell it too early, then you've missed your opportunity there.I would look at that as a bigger sin than perhaps not investing in it in the first place.We've seen a number of managers, I think, that have done that.I think that's, again, one of the things we look at is to Are they really able to identify who are the key value drivers in their portfolio?Can they double down on them?And do they recognize how to play the long game in terms of letting that value compound over multiple years?
SPEAKER_03: Have you seen a manager... sell their position, and then subsequently the company go to zero or crash and burn.In other words, they made like the great trade, you know, this thing became FTX and they sold FTX and not to pick on Sam Bankman Freed now serving in a correctional facility.But if you were in FTX and it went to 20 billion, 10 billion, whatever it was at, and you were a seed investor at 25 million or 10 million, and you sold your entire position, my Lord, you might look like a genius right now. Have you seen that happen where somebody sold and it went to zero or something similar to zero?
SPEAKER_02: Not in private companies.What we have seen, though, is companies that have gone public either via traditional IPO route or more recently via a SPAC deal.Oh, yeah. where the VCs have been able to get liquidity shortly after lockups had expired.And 24 months later, that company is in a very different place.You look at the market caps of some of those companies that went public in the 19, 20, 21 vintage, and they're pretty low.And so that tends to be more of what we've seen rather than taking early liquidity in a private company and then that company going to zero.Will Barron
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You can then iterate on these designs with an AI assistant, and then you hand off your completed designs as React or CSS code.Wizard's text-to-UI mockup tool is called AutoDesigner, and it's really cool.If you're watching, you can see it on the screen right now. here's the brass tacks.Wizard is going to help you go from idea to mock-up in minutes.So, if you're creating a product from scratch, this is going to save you so much time.Start building products today faster with 25% off Wizard Pro at wizard.io slash twist.That's U-I-Z-A-R-D dot I-O slash twist for 25% off.Stop wasting time and start shipping faster. Yeah, the one I can remember was WeWork.
My understanding was that Benchmark cleared their position or a very large portion of it in WeWork before it went public, maybe in the many billions of dollar range.And they might have been the only winners in that, aside from Adam Neumann getting a buyout. miraculously as well, which is crazy.It's interesting as we're having this conversation, I've come to the conclusion, balancing all these factors, that if you're a seed fund and you sell 10% once or twice or three times, you'll never be in a position to explain to LPs or yourself and sleep at night that you sold too much in a winter and you will have locked up enough of the win After you've sold 10 to 30%, 10%, two or three times that you'll feel, you know, pretty great.If the thing does become like, I don't know, I don't pick on any companies, but Buzzfeed, I saw was for nothing like less than their cash.I don't know.You remember those days from the dot-com era when companies were worth less than the cash they had in their bank account.Absolutely.Crazy moment in time, sir.
I'm accustomed to that, but this time around in the cycle, I'm going to... I've already started this discipline inside my firm, which is we're tracking all the secondary offers that are coming into us.People are like, hey, we have a name.We have a buyer.I'm like, tell me the number.And they're like, can you get on the phone?I'm like, I'm too busy to get on the phone.Just tell me the number if you want to have a relationship with our firm.You know, all these like... you must get some of this, right?Like some of these, like, I don't know if they're shady, but there's just like weird underbelly of private company sales going on and hustlers, you know, try to buy a position, sell a position, whatever.
SPEAKER_02: We see the same on LP stakes. We do get people contacting us saying, what would be your pricing on an LP stake in this particular fund?And sometimes they have a deal there that they actually are able to talk to people about.And sometimes they're perhaps looking for a bid in order to then go back to potential sellers and say, I've got a buyer who'll do this at X pennies on the dollar.Oh, that's gnarly.Yeah.
SPEAKER_03: So they're working both sides of the marketplace.Hey, you know, I hear Jason mentioned his first fund is 4.95X.Would you have an interest in taking a strip?Then they come to me.Oh, we might have somebody.Oh, that's a really interesting... Yeah.Approach.Yeah.I, I started to, you know, during this last two years as things were, you know, how do I say it?
Chaotic.I did have a lot of folks pitching me on these strips or getting me liquidity.I said, well, I personally don't need liquidity.I'm a worker. I've done okay for myself, so I'm heads down.But for shits and giggles, yeah, tell me what this is.And they're like, well, we can get you the GP, a little bit of money.So I want to ask you a question, might be uncomfortable or maybe uncouth in some ways.When you look at GPs and they start to make money, and money changes everything, especially for humans, how does that affect their psychology?And how do you parse that?
Somebody hits a home run. They had another home run and they're a GP.How do you know they're going to stay in the game and be aggressive?And how do you assess that?And is that an actual issue with fund managers over the 30 years you've been watching it?In other words, retirement, work ethic, desire, hunger, etc. ?
SPEAKER_02: I don't know if you remember a firm called Crosspoint.Yeah, sure.Again, we're going back to the late 90s here.They invested in Brocade.They invested in Ariba.These guys were up there with the Sequoias and the Kleiners in terms of the performance that they were able to generate.In 2001, 2002, they just said, look, we're done. made enough money.We're not interested in doing this anymore."I think one of the partners went and bought a motor racing team.
Actually having that honesty to say to their LPs, you know, we've made enough money where that's finished, I think is quite refreshing.It is a challenge when you're looking at GPs that have been successful individually. There are certain GPs that you know are going to do this until the day that they die.It doesn't matter how much money Vinod Khosla makes on his investments.I'm going to drag him out of the building.He will be investing in companies and working with founders until the day he can't. And I think there are a number of people within the venture industry that are like that.And I think they're doing it more because it's a passion and the money is just a way of keeping score.They're super competitive.They want to win.
They want their companies to win.They want to beat the guy down the street.And they'll keep doing this until they're not able to. I do think it's important that you do have a relationship with your GPs so you get a better sense of what they're doing it for.But I also think as organizations, it's really important to continue to bring new blood into the partner group.One of the things we've seen... With good firms that have fallen away, it's happened because they haven't handled the succession properly.You get senior people who are still taking the bulk of the economics.Their name might be on the door, but they're no longer doing the work.They're not getting out of the way to allow that next generation to come through and to put their footprint on something.
So if you look at the very best multi-generational firms, they've done a really good job in handling that succession and keeping the senior partners involved, but doing it in a way where it's much more in a mentoring capacity rather than still being the dealmaker in that organization.So I think that's something that's really important for us to see.We want to see that new blood continuing to churn.And if we don't, It's a red flag.
SPEAKER_03: Yeah.Kleiner Perkins comes to mind as taking a couple of, I'm going to be generous, but taking a couple of swings at bat to do their transition.And it seems like they got it right with Mamoun, Ilya.They got some great folks over there now running some pretty good investments, but that one comes to mind.And then Sequoia getting it right, Ruloff and Alfred after Doug and Moritz after Don Valentine.And they seem to have having watched that one happen before my eyes.Cause Ruloff was my friend who, you know, I remember his first year there when he wrote the deal member for YouTube and just watching Moritz and Doug, you know, sort of mentoring him and Alfred Lynn, you know, and they just learned the craft of it.But I was there recently and Doug was there, you know, and I was there, I was at the San Francisco office a year ago and Moritz was there.
So, you know, this idea that people have transitioned, they seem to take a decade to transition at Sequoia, whereas in other firms, maybe they're just collecting these ginormous fees. I guess it's another interesting topic for us, the allure of more fees.And how do you think about that?One of the challenges I have is people don't give me straight feedback.When you're talking to an LP, they don't tell you what they don't like about your strategy or fund.So you and I have... Luckily, I get to have you in my circle here and I ask you, hey, candidly, tell me, really bang on this here.I want to be better at my game.Tell me where I suck.People were like, hey, in this market, should you get 25% carry with a ratchet up to 30?
That's a blocker for some people. And I was like, oh yeah, I never considered that.And then I asked five people and like two of them out of the five were like, yeah, that's our blocker.I'm like, why didn't you tell me?Like, nobody's telling me the truth here.Tell me the truth, you know?And so how do you think about fees?How do you think about carry structure?Because now I had, I also had another person who said, don't lower your fees.Don't lower your carry because it's a sign of how good you are that you can actually close funds with 25% carry and then ratcheting it up to 30%.
So, which I've now disclosed publicly here was my carry structure, which I thought was fair, you know, given the seed round and my performance, but it is a blocker for some people.So you just basically, it's a non-starter that they would participate with you.How do you think about fees?How do you think about carry?Two arguments I've heard.Keep your carry structure high.It's a signal that you're a quality hotel, that you have a thousand dollar a night room and you don't discount it or listening to the market.
SPEAKER_02: Yeah.I would say pretty much all of the managers we back are at that premium carry level.They deserve it because of their performance.The way that we look at it ultimately is, what are the net returns back to us?If the net returns back to us stack up, then we're happy to pay the fees and the carry that you need to pay in order to access that performance. So I think you can get very fixated on paying premium carry for the wrong reasons.The challenge with premium carry is when it doesn't come with strong performance.So my preference would be to see a manager that said, we're starting at a 20% carry.It goes to 25% when we return this.It goes to 30% when we return that.
Have your full catch-up. But that means that interests are then aligned.If you do well, I do well.If I do well, you do well.I'm happy with that.The reality is, for the very best managers out there, they don't need to offer those terms to investors.So they're not going to do it.
SPEAKER_03: Of the terrific 12, how many are premium carry?Ballpark.I would say all of them.There you go.So you like to stay in luxury hotels, the price is the price, and you get the experience you pay for it.
SPEAKER_02: The bigger thing for me, though, is less around the fees and carry.It's more about fund size.I think one of the challenges we've seen with the cohort of managers that we do back is, like everybody else in the industry, they have scaled their fund sizes over the last two or three cycles. And now you start to... The challenge for us, it goes back to the equation we were talking about earlier.Exit size versus ownership percentage versus fund size in order to get those fund returners.And so one of the things I'm hopeful for, and we are starting to see it a little bit, we've got one or two managers that are coming back with new funds in the market today, and they are right-sizing their fund sizes to some extent.And so I would be... For me, it's less capital is better than more capital. We've seen that with companies, the whole issue around what SoftBank was doing.I grew up in the venture industry in the late 90s, where a lot of funds increased their assets under management pretty drastically and it didn't work out.And so my default position is in venture, less capital is better than more capital.
You need to have enough.You need to be able to do the math we were talking about, 30 shots on goal, be able to lead those A rounds.So there is a minimum size that works. But I also think there is a concern that if you get too big, you just become a capital allocator rather than a venture investor.And it goes back to what are the returns your LPs are looking for.If you're then getting the big checks from the sovereign wealth funds, then they're probably happy with that median venture return.We need to do better than that.
SPEAKER_03: Not all LPs are looking for the same thing.Some would like to get the average because the average is better than other averages and they want access to this.And average, like as we started our conversation, average with a chance of alpha is a great concept for them.And you did see that with Andreessen Horowitz going to 10 billion plus under management, 20 billion assets under management.At least that was the perception here in the Valley.You know how that's turned out.I don't have their fund returns and... except maybe for the press, you know, dunking on fund managers.They don't understand the J curve, which I don't know why, but you're not going to believe this Dave, but somebody didn't understand.Somebody on the internet made a mistake and I felt obligated to go fix that and correct it.
But these journalists were all looking at like Andreessen Horowitz leaked data or something.And it was like misinformation about This is year three or four of that fund.And I'm like, I'm glad that that fund has any IRR.Do you know what the J curve is?And just started asking these folks, you know, if you're a journalist, you don't know what the J curve is.Listen, what we do is unique in the world.And so, and the J curve, did the J curve go away for a decade?Is that the problem in our industry?Yeah.
SPEAKER_02: Yeah, it did.It was interesting.Every three months, we do a review of all of our funds.We just did it yesterday.What was really interesting was that when we were looking at the investments we've made in our current fund, which is fund 16, 90% of those investments were below 1X.They were in the J-curve.That's the first time we've seen it for probably six or seven years.The J-curve prior to that had been compressed and in some instances had disappeared altogether.Whereas this time around, it's back.
While that might seem counterintuitively for me, that's a positive.
SPEAKER_01: Absolutely.
SPEAKER_02: Because it means less money is coming into the industry.It's harder to raise capital.Only the best companies are going to be able to do that.So the level of competition for the best companies is going to go down.Their ability to be more capital efficient because they're being forced to do more with less is increasing.Their ability to recruit the best talent is increasing because that talent isn't as thinly spread. So the fact that we're seeing a J curve in years one, two, three of the investments we've made recently, I take as a positive.
SPEAKER_03: Yeah.Constraint makes for great art, you know, and deadlines make for great art.This is something I've learned in my career.I was listening to an interview with Bob Dylan and, you know, arguably blood on the tracks.I'll go back to Bob Dylan today.I don't know why, but. Yeah, Blood on the Tracks, I mean, a seminal album.And they were, you know, asking him, like, how did, you know, he hit this magical album, you know, Tangled Up in Blue, Sheldon from the Storm.This is really great, great tracks on there.And he said, yeah, you know, Columbia Records, I owed them a record and they were going to sue me and I had gotten a big advance.
And so I had to give them a record.And so my manager said, Bob, you're going to have to pay a big settlement if you don't get that record out.So I went to the studio and I recorded it. And it's like, oh, he's not a reporter.He's really crestfallen at the inspiration for Blood on the Tracks.I had to return the advance or I had to get this thing out the door.
SPEAKER_02: Yeah, no, I was going to say it's crazy.It's crazy what it takes for that inspiration to happen.You just never know.
SPEAKER_03: And then I remember at the turn of the century, the digital camera came out.The Sony VX1000.I met this kid, Bennett Miller.He did a documentary called The Cruise at Sundance.And there was this big debate.Well, now, because you weren't using film socket, you didn't have to get it developed. that we would see this incredible Renaissance where anybody could take this VX 1000 shoot on digital and you could do a hundred takes.So no longer did you have to worry you would get better art because, and it turned out the constraint of having to ask your investors for more money to develop more film, to get an extra day of shooting. The constraint of only being able to shoot for 10 days on an indie film or 45 days on a medium-sized film or whatever it is, that constraint made all of those artists, directors, set designers, actors focus.And that's my perception of what's happening right now is the constraint of LPs, constraint with the founders having only a certain amount of money deployed.
everybody gets a smaller budget, everybody gets really focused.Make better art, make better startups.It's just clear as day to me, you know?Yeah, yeah.
SPEAKER_02: No, it's really interesting.Just one comment on the sort of fund sizes and what you were saying about a firm like Andreessen.Again, there seems to be a bit of a narrative going around sort of VC Twitter that it's impossible to get fund returners on a billion dollar fund.So we just had to look at our data. um to see how many um how many times we've had one company return a billion dollars back to a fund um and and there's been uh nearly 50 instances five zero five zero wow yeah i could name them yeah it's facebook uber robin hood yeah i mean it's hard to get a billion dollars whatsapp Snowflake, Coinbase, DataDog, Adgin, Roblox, Pinyodo, UiPath, Slack.Some of them are still unrealized.So, you know, Databricks, Figma, Stripe.
SPEAKER_03: Comes to mind, yeah.Yeah, it makes sense when you think about it.It's so hard to hit a decacorn.That's the other thing.Like a $10 billion company, everybody thinks that they're, I think because of the paper corn, I just had Aileen Lee on the pod three weeks ago.I mean, it's such a bounty of knowledge on this podcast.And she was talking about the paper corns and we were trying to estimate of whatever number of unicorns out there.She thinks it's like 40, 50% are not going to reach unicorn status again.What do you think it is? unicorns from the last cycle that will not get a billion dollar valuation again?
SPEAKER_02: Yeah.I mean, I don't have any visibility into putting a number on it.I think broadly, I think there's a lot of companies out there that are way overvalued.And one of the things we look at is those loss ratios.And we talked about somewhere between 50% to 60% of companies not returning capital back to the funds that back them. We've seen those numbers be a lot lower in recent vintages.And my sense is that they are only going to go up.So whereas for the last four or five vintage years, we might be at 20% to 30%, ultimately, I think they're going to hit those 50% to 60%.So if you're backing that into what does that mean for companies, I don't know what percent of companies are valued at a billion dollars out of the cohort that was funded over those years.So it's difficult to give you a percentage of
How many of them are going to disappear?But I think broadly, we have to expect that things are going to get worse before they get better.
SPEAKER_03: In the seed stage, it was unbelievable to me how often... a founder would be able to get a bridge for 18 months, 12 months.And they didn't have product market fit.And this was just a new startup in the same shell of the past one.It was basically a hard pivot or a soft pivot, but generally hard pivots.And then something happened last year where the founders themselves, and my belief is one I learned from Ruloff, which was I give up when the founder gives up or the day after the founder gives up, that's when I decide to give in. And accept the reality that the startup's a zero or whatever.We're doing Aquahire, whatever it is, the shutdown.Yeah, we saw them all come in the last year.And we had to sit with the founders, recognize the effort they put in for two, three, four, five, six, seven years, and that it was going to result in a zero.
And I give them all a talk.I said, listen, this is the greatest success that you tried. And all I ask in this failure is two things.One, we shut down properly so that you don't have tax issues and the employees and everything.So just let's do this properly because I've seen this blow up in a bad way.So let's wrap up gracefully.And then number two, can I be your first phone call when you have your next idea?It's the only two things I ask. And then let's have a dinner and, you know, 30 days or 60 days.And when you're licked your wounds and feel good and let's figure out what we learned and what you want to do next.
And if you want a gig somewhere, I can help with that.If you need a vacation recommendation, I can tell you where to go skiing.And I just kind of like really focus on that moment because man, having been there myself as an entrepreneur, it sucks. It really sucks to put the startup to bed.I hate to say it and trigger anybody, but it's like putting down a dog or something.That feeling of like, it's eminent pain and suffering I'm going to have.But I find so many VCs and so many capital allocators don't own that moment.They just disappear from the board. And they stopped talking to the founder.And I just thought, well, if you want to be there.
SPEAKER_02: Yeah.One of the things that, that I think will be interesting again over the, over the next year or two is it, it feels like we've, there's, there's clearly been a huge influx of, of new entrants into the VC space.Um, whether they're, you know, solo GPs or sort of super angels or, And we haven't invested in any of them, but we've talked to a number of them.And it does feel as if there is a, clearly not all of them, but a significant percentage that are almost seen as a lifestyle choice. They're doing it because they can raise a little bit of money from friends and family, and they can fund their friends' companies, and they can be everyone's favorite person.And when the music's still playing, it's great.But when you have to tell your friend that you're not going to fund their next round, and they're going to have to lay off half their company, and actually they're probably going to have to shut their company down... then it suddenly becomes a very, very different business.And so I think it'll be really interesting for us to see what happens to that group of investors that came in towards the top of the market, thinking venture was an easy asset class, when you do start to have to have those really, really difficult conversations.
SPEAKER_03: Yeah, they're just not built for it.I'll be honest.I'll call it what it is.When you have to have those hard conversations, some people are built for it.Some people aren't built for it.And I just don't think most people are built for it.I'll be honest.This is an extreme pursuit on the founder level and the GP level, on the LP level.And each person... It's a little bit less extreme, but it's still an extreme pursuit.
And most people are not built for the conversations we're talking about here and how hard it is.And then I can tell you, if you do happen to be lucky enough to make it to your third or fourth fund, Guess what?Now you got a track record.Now you have every bet you've ever made and people like yourself who love to dive into that data.And then you will face the reckoning.You gave an extra 50K to this company instead of giving it to a new company.Why?Oh, well, I wanted to support the founder. And this is something where I've changed my attitude 100%.
I'm telling founders, the reserves are for the top 5% of performers.And then my team, because they have big hearts and they love these founders.I really think we should put something in.Hey, can we just put 50K?Can we put 100K?And I have to tell them, hey, well, that 50 or 100 could go into the top 5%. who we know are going to on average return at 20, 50 X. So do you want that a hundred K to turn it to 5 million or do you want to put a hundred K into something that we are relatively sure we'll just extend this life for 12 months.And this is, you know, again, not to use graphic analogies here, but if you know, this is, you know, person's going to die.We're doing triage.That's the way to say it.
And you know, triage is not a pretty business.
SPEAKER_02: Yeah.And it's interesting.It's super important as well, because one of the different ways we've cut our data is we've talked about what it looks like in terms of the percent of companies that don't return capital or do 5x.We've also looked at it by the cost basis.So how much capital actually goes into each of those companies at those different levels.So companies that return less than 1x, companies that return 1 to 3x, What we find generally is that the underperforming managers tend to put more capital into their worst-performing companies.Let's say they had 50% of their companies fail to return capital.They could be putting 55% to 60% of that capital into those companies. Whereas the opposite is true for the best-performing funds.
They actually put less capital into their worst-performing ones, and they put more capital into their best-performing ones.If you were looking at, say, 5% of their companies were 10x multiples, they might have been able to put 7%, 8%, 9%, 10% of capital into those 10X companies.And it's that nuance of portfolio management and portfolio construction, which I think you have to be a real kind of venture geek in this industry to really appreciate.
SPEAKER_03: It's such a good point, man.I think it's the one for me as a manager that, along with doubling down, which this falls into... Really the most important of my game that I have to get better at, you know, and you have, it's great about talking to you and, you know, appreciate your time and the conversations we had off the program is you can only get better at the game by studying your performance.If you're not willing to videotape yourself, putting up three point shots and have people say, listen, you know, this is what you need to change in your shot or like review game tape.You're not going to get better and you're not going to win.And then if you don't win, you don't, you know, you may be able to fake it for two funds, but. Can't make it for three or four.You got to bring it.And I know the reason why these managers give it to the bottom half of the performers instead of the top half.It's because the bottom half are the squeaky wheels that run out of money that don't have a competition to buy their shares.
So if you were to compare the bottom to the top, the top has got tons of people throwing money at them.And they may not even come to you or they may ask you to waive your pro rata. In which case you got to fight for your pro rata, which I've become an expert at, you know, dealing with certain firms.I won't say which ones that have tried to screw me on my pro rata, but people follow me on Twitter might be able to guess literally being in standoffs with one particular fund twice and they know who they are. But then you got the other group, which is struggling to get capital.And so they ask you for capital and founders are self-selecting for charisma, self-selecting for spinning a yarn, the good ones at least, but I think all of them.And so the bottom half that probably should be shutting their companies down, man, they're just so good at, hey, I need you, J-Cal.You supported me early.I need you to support this round.I need you to lead this round.
We don't lead these rounds.We've already made two bets on the company.I find having that conversation on the way in two or three times with the founder, how we do our follow-on investing has helped us deliver the news a little bit more crisply later on.Hey, remember when we told you we only have reserves for the top 5% of performers?Here's what that looks like right now.It looks like 4X revenue year over year. What was your revenue growth?
SPEAKER_02: It doesn't help either that there are so many examples of really successful companies that have had those near-death experiences that in the back of your mind as an investor, you're thinking... That's a good point.Just one more round.Just one more round, we'll get them over.Because every company that you invest in, you have high conviction on.Every founder you back, you believe is going to be super successful. And so to actually flip the switch and say, you know, it's time to call it a day because for that founder, their most precious thing is their time.It's not the capital.It's their time because they have a finite amount of that.And if they're spending it trying to, you know, knock their head against the wall on something that's not going to work, then they're missing doing something that could be really impactful.Yeah.
SPEAKER_03: Yeah.It's just such a good point.I didn't even consider that one because you also have the fund manager, the GP is like, I just want to see one more card.Maybe my hand will improve.And you know what?Sometimes it does.Sometimes you hit runner runner and all of a sudden your flush comes in or you hit your straight or you hit your trips and oh, yum, yum.But you do have to put a percentage on that.Listen, Dave Clark, amazing to have you on the program.I'm putting you on the schedule right now.
You're going to be like one of the top guests already of 2024 or so. We're going to do our year-end wrap-up in December.Can I put you on the schedule for our December show?Yeah, no, we'd be delighted.All right.Thank you, my friend.And we'll see you all next time on This Week in Startups.Bye-bye. Hey, everybody.I talk to a lot of founders here on This Week in Startups and as an investor, and they tell me the same thing over and over again.
They want to spend time together.So we've been working here on a new meetup program.We call it Founder Fridays.And Founder Fridays are an event by founders for founders.This is an event that is hosted in cities by people like you.If you're listening to This Week in Startups, you're a founder.Now, why is it important for founders to get together? Shouldn't you be at home just focusing?Shouldn't you be in the office just focusing on your startup?Well, if you get together with other founders, true founders who are in the arena building like you are, you're going to get a lot of value from that because you can trade notes about what's working at your startup and what's not working.
The truth is, if you're facing a problem, there are hundreds of founders out there who have probably solved it already.And instead of you banging your head against the wall, When you sit there and you talk to three or four founders, somebody say, oh, you know what?I had that same human resources problem.Oh, I had that same technical problem.Oh, I had that same marketing problem.And they might tell you about a tool or a service that'll solve that problem for you.This happens over and over and over again when I do Founder Fridays with our portfolio companies.Now we're going to give you that same experience.But here's what I need you to do.
I need you to host this in your city.So you're going to go to thisweekinstartups.com slash meetups. That's it.And you'll see a landing page where you can sign up and you can say, I want to host in my city.Now your city may already be hosting, so you can just join that person.We're using a wonderful piece of software that we've invested in called River.You can sign up for a River account just by going to thisweekinstartups.com slash meetups. And we're going to do these on a rolling basis.You can join an existing meetup if it's already occurring in your city, or you and one or two other founders can start your own.Please go to thisweekinstartups.com slash meetups if you are a founder.
This is for founders by founders.We vet everybody to make sure you're a founder.And if you host it, it's a non-commercial event.So this is your chance to connect.Go to thisweekinstartups.com slash meetups.
